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Monthly Archives: June 2012

≈ Comments Off on Interest rate cut by RBI must for growth in realty sector

The RBI’s policy to continue with current high interest rates in order to rein in inflation through a tight monetary policy could prove counterproductive, especially for the realty sector.

In a big disappointment for homebuyers, the RBI did not take any proactive measures to bring down the interest rate in the market.

That means, the present high rate will continue to rule the market, which has been affecting the sentiments in the real estate sector. The RBI left all the policy rates unchanged.

It left the repo rate (the overnight lending rate to banks) at 8%, reverse repo rate (the rate at which banks can park their surplus fund with the RBI) at 7% and cash reserve ratio — the portion of deposits that a bank is supposed to keep with the RBI — at 4.75%.

There was overwhelming expectation that the RBI would lower the repo rate by at least a quarter of percentage point to 7.75%. But because of concerns over inflation, the RBI decided not to give relief to homebuyers.

In the last one year, the interest rate on home loan has gone up by one to two percentage points. This has clearly increased the burden on the average middle-class homebuyers. If the interest rate goes up by two percentage points to 11.5% from the earlier level of 9.5%, the EMI increases by almost 14% to Rs 53,321 from Rs 46,606, on a loan of Rs 50 lakh for 20 years.

The increase is substantial enough to force the average middle-class buyers to postpone their decisions to buy a house. And this affects the industrial activity in the country, as the construction of one dwelling unit creates demand not only for cement, iron rods and bricks but also creates demand for hundreds of other household items like furniture, beds, curtains, curtain rods, bathroom fixtures, TVs, computers, among scores of other consumer durables.

In the policy statement, the RBI says: “Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”

However, the fact remains that the real estate sector turned bullish after almost six years of sluggish growth in 2003, when the interest rate fell to an all time low of around 7.5%.

Anand Sharma, a senior minister in the Manmohan Singh government, also said: “We have seen a fourth quarter running as the industrial production has been adversely impacted. The investment sentiment is low. Therefore the RBI decision, whatever reasons they have based it on, is disappointing and will not help in reversing the trend when it comes to the core sector of the industrial manufacturing.” Sharma, the industry and commerce minister, was voicing the sentiments of the industry and the market.

In a report, Edelweiss Research said that the RBI has already succeeded in curbing demand-led inflation, and the economy has slipped far below potential.

In such a scenario, keeping monetary policy tight to address inflation could prove counterproductive, the report said. Fiscal deficit would worsen further as tax revenue falters due to weakening growth, investment slowdown would deepen and inflation could remain sticky due to lack of capacity creation.

“For the real estate industry, which has been battling sluggish conditions for quite some time, the decision of not bringing down the interest rate means that the hostile environment will extend further and pre-empt any respite to the industry stakeholders,” Pranab Datta, the vice-chairman and managing director of Knight Frank India, said.

Sales of residential units have been dipping for the last two years. A report says that the sale or absorption of residential units in the National Capital Region (NCR) and Mumbai has come down by 50% in the first three months of 2012, compared to last year. In the NCR, 15,104 houses were sold between January and March this year, against 35,420 units last year.

“From the point of the real estate sector, a further rate cut would have resulted in positively influencing the sentiments within the sector. The reduced interest rates for mortgages would have pushed the sales volumes in the residential section up,” Sanjay Dutt, executive managing director of Cushman & Wakefield, South Asia, said. The buying sentiments also get affected because of the persisting high inflation rate, he says.

For the real estate sector, in particular, the persistence of a generally tight monetary stance would act as a drag on development over the balance of this year with the growth in construction output likely to slacken further.

This will be particularly visible in some key residential markets where supply shortfalls will continue to underpin prices in the face of a weaker economic picture, says Simon Rubinsohn, the chief economist of RICS.

Abheek Barua, the chief economist of HDFC Bank, replying to a question whether the RBI needs to cut rates, said: “Growth is likely to remain subdued over the next few months, staying significantly below the RBI’s estimate of ‘potential ‘ growth (7-7 .5%).

While exchange rate depreciation in recent months could support growth by curbing imports and making exports more competitive, there is reason to believe that the disorderly manner in which this depreciation has happened has created a fair degree of uncertainty among exporters and importers and has offset any salutary impact of exchange rate adjustment. Thus, further repo rate cuts may therefore be necessary to support domestic growth.”

Builders and their associations have also expressed unhappiness over the RBI’s decision. Navin M Raheja, the president of Naredco and the chairman and managing director of Raheja Developers Ltd, said: “We expected some cuts, so that the lending rates could come down. It is disappointing. The home loans will continue to be at higher interest rates.

Rakesh Yadav, the managing director of Antriksh Group, says: “Undoubtedly, the RBI’s decision came as a shocker for real estate developers like us who were expecting at least a cut by 25 basis points in repo rate and cash reserve ratio. With the RBI leaving interest rates unchanged, the real estate sector is feeling the heat, as disappointed homebuyers stay away from buying properties.” Ashwani Prakash, the executive director of Paramount group of companies, says that the present status of real – estate sector needs immediate attention from the government.

“The developers, promoters, investors and homebuyers were all looking to the RBI for a favourable revision in the credit policy, which would have given a much needed boost to the sector. But the RBI has once again deprived the real estate sector of the support which it had always been looking for by not revising the repo rates and the interest rates.”

Gaurav Mittal, the governing council member of Credai and managing director of CHD Developers Ltd, says that the RBI has taken a cautious stand by keeping the repo rate and the CRR unchanged.

“The step has been taken owing to the strong inflationary pressures. However, considering the plight of the productive sector and the lack of funds, especially in the real estate sector, a rate cut would have been a boon and fuelled growth. The RBI must take cognizance of this fact and we hope for a rate cut in the next policy to induce more liquidity in the market.”

Deepak Kapoor, the director of Gulshan Homz, says: “We really do not know the RBI’s take on inflation . But with a declining trend in growth, the RBI might have to announce reductions to encourage the real estate market demand.”